RBI would come out with its Second Quarter Review of Monetary Policy. It came out with its Macroecon and Monetary developments today which is independent of tommorrow’s policy. Its happened many a times that things said here and tommorrow’s monetary policy and exact opposites.
MSF (penal rate) was reduced by 75 + 50 bps (latest cut on Oct 7, 2013). Now the LAF corridor width between Repo and MSF is 150 bps (earlier touched 300 bps) with Reverse Repo @ 6.5%, Repo @ 7.5%, MSF @ 9%. The spread of MSF over Repo which the RBI guv stated would do most of the walking. It has already walked 150 bps effectively (125 bps direct MSF cut and 25 bps due to Repo rate rise).
With exchange market conditions improving, RBI had started rolling back the exceptional measures that were introduced in July, i.e hiking MSF by 200bps and restrictig daily bank borrowing to 0.5% of NDTL. There were CMB issuances too to drain out liquidity. Effective policy rate had become the MSF. Cost of funds for lending institutions was a weighted average of repo and MSF. It also offered term repo in addition to overnight repo facility. The doc also talks about high and persistent inflation and the need to manage this growth – inflation trade – off.
RBI action could be to hike repo rate by 25 bps or even 50 bps (in – line with its stance to keep repo rate at appropriate level considering high inflation) and might just reduce the MSF by 25 bps (inline with stable FOREX market scenario) if repo rate hiked by only 25 bps which would normalise the corridor.